/Financial-Frictions-Course

This is a PhD course on financial frictions in macroeconomic models. This repository includes all the materials taught and is constantly updated

Primary LanguageMATLAB

Course: Financial Frictions, Monetary and Macroprudential Policy and Household Heterogeneity

This course is written for the EUI Econ PhD students as an advanced half-credit course.

In a nutshell:

📍 Gives an introduction to DSGE models and their solution with the Dynare package

📍 Studies the incorporation of financial frictions in DSGE models

📍 The use of DSGE models for the design of monetary policy and financial regulation

📍 Extends modelling framework to household heterogeneity and studies the impact of monetary policy

Day 1: DSGE models overview, the RBC model & Dynare introduction

During the first lecture we will go through a short introduction on DSGE models and their various solution techniques. Then we will set up the very simple RBC model and learn how to use Dynare to solve it (get the policy functions). This is of hight importance as we will go through much more complicated models in the next lectures

Material

  • DSGE models introduction slides
  • RBC model set up and Dynare introduction slides
  • Codes to solve the RBC model in Dynare

Take home exercise

  • Extend the simple RBC model to include investment adjustment costs as specified in the end of slides
  • First solve the model by pen and paper and add the new parts in Dynare to find the policy rules
  • Construct a vector [0:4] with step=1 grid for the adjustment cost parameter and show the different IRFs for output, consumption, investment and labour hours for every level of the parameter
  • Solution will be uploaded in the Dynare folder
💻 Prerequisites
  • The model file runs with Matlab and Dynare 4.6.x
  • The mod file the SS file need to be at the same folder

Day 2: Asymmetric Information

In the second lecture we will cover one of the most widely used option for financial frictions in DSGE models, the assymetric information friction. This started from Townsded (1979) and became widely used in a DSGE model from Bernanke, Gertler and Gilchrist (1999). We will go through the latter in detail both in terms of theory and coding/ solving the model with Dynare

Material

  • BGG model presentation slides
  • BGG equations document
  • Codes to solve the BGG model in Dynare
  • Codes include both flexible price and sticky price specification of the real sector, together with the BGG friction

Take home exercise

  • Continue with part 2 of the previous week's exercise
  • Compare BGGflexi.mod and BBGsticky.mod, the model with flexible and sticky prices both are in this folder
  • Provide the impulse responses of both models in the same graph for output, consumption, investment, spread, loans and entrepreneurs' new worth
  • For the cases of a positive productivity and a risk shock
  • This file is the file I used for the lecture plots, it will help!

Day 3: Limited commitment

In the thirds lecture we will cover the second most used method of introduting financial frictions in DSGE models, the limited commitment friction. The seminal paper of Kiyotaki and Moore (1997) (it is even in the Wikipedia) started the tradition of borrowing constraints due to limited commitment of households to repay their denbts. After the financial crisis of 2008, this stream has regained popularity by a series of seminal papers. In this lecture we will go through the Gertler and Kiyotaki (2009) paper which introduced this friction in the banking sector.

Material

  • GK model presentation slides
  • Codes to solve the GK model in Dynare

Take home exercise

  • In the codes provided, no calibration has taken place, I have just perform a parametrization of the model
  • You have to treat the parameter (theta), , as a free parameter and calibrate it such that the leverage (phi), , in steady state is 4.5
  • Show that's the differences in IRFs after a capital quality shock with the non-calibrated version

Final Evaluation

Students are given with two options

Option 1: Solving a Financial Frictions model

  • This is mainly for those that want to continue with this in their PhD
  • Choose a paper of your choice with some financial friction component
  • Find the steady state and solve it in Dynare
  • Ideally, extend in in some dimension (e.g. add macroprudential regulation policy)
  • Write up a 3-4 pages report with results, analysis etc.
  • Joint works are encouraged

Option 2: Write a referee report or a research proposal

Referee report

  • Pick a paper of your choice or from the course outline
  • Write a referee report

Research Proposal

  • Write a proposal concerning original research in one of the topics examined in the course
  • Write a referee report
  • The proposal could be an extension of one of the papers seen in the course, a new application of the models presented, or a new model/empirical analysis.
  • The key is to stress the motivation of the proposed research, what is new, why it is interesting and/or important.